$40 Million Heist Leads to Bitcoin Whodunit

Even drug dealers working from the relative obscurity of the Internet can get robbed.

After authorities this fall took down Silk Road, the online black market, numerous copycats popped up to take its place. One of them, named Sheep Marketplace, told users it was shutting down this weekend after someone made off with its merchants’ stored Bitcoins – possibly more than $40 million worth of the virtual currency, according to some estimates.

Black Market Reloaded, another Silk Road successor, announced shortly after that it will begin to shutter itself as well. “Sheep went down and BMR can’t stand,” its administrator, known as “backopy,” said in a message to users.

The underground economy always has been susceptible to theft since there is no legal recourse for victims. (“Officer, somebody stole my drug money,” tends to not go over very well.) But because Bitcoin has become so widespread internationally and is so easy to transfer, a fraudster can make off with a lot more money from the comfort of his computer.

“To move that type of value in cash would be heavy” – literally blocks of bills — said Jean-Jacques Cabou, a Bitcoin expert and attorney at Perkins Coie LLP. “People all over can fall victim to unscrupulous scams more easily.”

This weekend, Sheep administrators wrote on a message board to users that someone stole $6 million from site users. The site then stopped letting merchants withdraw money from their accounts, according to posts from self-identified Sheep users on Internet message boards.

How could this happen? Bitcoin transactions are irreversible and not managed by a central authority, meaning users can’t call up customer service to report fraudulent charges, even if they were for legal goods.

But a few digital clues left by the virtual currency have set off a manhunt by the Internet’s Bitcoin community.

All transactions are maintained on a public ledger, called the block chain, that shows transfers from one Bitcoin address to another. So in this case, users can actually see millions of dollars worth of Sheep bitcoins being siphoned off to new accounts.

Bitcoin addresses don’t have to be linked to a verified name or address. So self-appointed detectives have not yet determined who is sitting on the pile of allegedly stolen funds, but the chase continues.

One of those investigators and a self-described Sheep user, who goes by the username “sheeproadreloaded2” on the Internet message board Reddit, compared himself and partner to “those two Watergate journalists,” in a message to The Wall Street Journal. “I’ve got to go to my day job soon.”